Yesterday was quiet in terms of major data so markets tended to follow the dominant trend and for most equity markets that was a continuation of the press higher, with the USD also trading firmer on the day, the Euro and JPY faced selling, while commodities remained in a rut with Oil, Gold and silver all failing to gain any traction with downside pressures remaining. In Europe stocks edged higher while in the US another press to record highs for the S&P and NASDAQ before falling back. USDJPY breached 114.00 area we highlighted yesterday after a rally over 1%, while EURUSD dropped back to support at lows just above 1.0850 (which coincides with the big gap higher after round 1 of the French elections). In currency markets the focus for most will be on central bank policy, markets are expecting action from the Fed in their June meeting, waiting to see if the ECB will look to reduce their own QE program, and eyeing the BOE carefully to see if the UK’s recent strong data and inflation readings will force the BOE to raise rates, which they cut last year post Brexit referendum to help calm markets, thus creating the inflation problem they now face.
In terms of political risk, the election threat is out of the way for now, the UK in June and Germany in September will be the big risks on that front going forward, however that is not to say we are free off all geopolitical risk. Donald Trump’s sacking of FBI director Comey created a little wobble in afterhours markets last night, while the prospect of further nuclear tests from North Korea also pose some concern, with fears the US may well take steps should Kim continue to push the boundaries of patience. That being said, overnight the Nikkei traded higher, helped by the broadly weaker JPY while this morning we are looking at a tentative start to European trading.
We’ll take a look at GBP and the pound has found itself in demand this morning on rumors there is some disagreement within the MPC about the direction of interest rates, some on the panel apparently wanting to tackle rapidly rising inflation, especially as UK data thus far has been resilient through much of 2017. This is a particularly interesting point ahead of tomorrow’s BOE policy statement and inflation report. GBP finds itself in an interesting position, the pound has been pressing higher against USD, JPY and the Euro amongst other, in fact GBPJPY is up over 10% in less than a month, while GBPUSD is consolidating just below the key 1.3000 area after a 5.5% rally in the same period. These are significant moves in a short period of time especially as we’ve seen little major policy indication from the UK or BOE. Positioning would suggest markets are expecting a rate hike or at the very least a hawkish BOE tomorrow and if that does not happen sterling will find itself exposed to selling. The event itself may well binary should the BOE convey a clear bias, a favour of hiking rates will certainly see GBPUSD break above 1.3000 and EURGBP will be under pressure to downside below .8300.